What you will be able to do
- Reconcile cash available for repayment and calculate coverage and headroom.
- Test collection delays, downside debt capacity and borrowing-base availability.
- Prepare a traceable evidence index and a practical covenant-monitoring plan.
Before you begin: Working knowledge of profit, cash flow, borrowing and customer credit.
Specify purpose, amount, tenor and repayment source
Start the credit case with the use of funds. A seasonal inventory facility, a long-lived machine and a continuing operating loss create very different financing needs. Estimate the amount and duration of the cash gap before selecting a product or repayment schedule. The primary repayment source should follow the transaction being financed: customer collections for working capital or sustained operating cash for an investment loan. An asset offered as security does not remove the need to explain repayment. Compare maturity with the time needed to generate cash, and identify refinancing assumptions explicitly. A short facility that must repeatedly roll over can create material risk even when the annual profit forecast appears comfortable to management.
Translate a ratio into a cash buffer
Suppose this fictional agreement requires coverage of at least one point two five times. With debt service of eight hundred thousand, required available cash is one million. Our base case therefore has only one hundred thousand of cash headroom above that threshold. This translation is more actionable than saying the ratio is comfortably above one. A collection delay, cost overrun or tax payment of slightly more than one hundred thousand could remove compliance. Distinguish covenant headroom from the bank balance and from undrawn credit: they measure different constraints. Also verify testing dates, cure provisions and permitted adjustments in the actual agreement. The threshold used here is illustrative, not a universal lending standard or a promise of acceptance.
Find the weak month hidden by annual coverage
An annual coverage ratio can conceal a cash shortfall in the month a large principal payment falls due. Build a monthly cash schedule using actual sales seasonality, collection lags, supplier terms, payroll, taxes and debt dates. Roll forward the opening balance and show the minimum cash position before and after committed financing. Recheck borrowing-base availability in that weak month; the same downturn that delays collections may also make receivables ineligible and reduce the facility. That interaction is a common source of false comfort. Model contingency actions with realistic execution dates and costs. Selling inventory or obtaining new equity is not an immediate solution simply because a spreadsheet can enter the receipt in the required month.
Write an evidence-led financing recommendation
The credit memo should make a clear financing recommendation while exposing the assumptions that could overturn it. State the purpose, amount, tenor and primary repayment source, then reconcile the requested structure with the operating cash cycle. Present base and downside coverage, monthly cash needs and collateral availability as separate analyses. List material exceptions and proposed conditions with accountable owners and dates. Distinguish information supplied by management from independently checked evidence, and identify any specialist legal, valuation or assurance work still required. Explain why the proposed mitigations are feasible and what risk remains afterward. A concise, traceable argument is more useful than a large attachment pack whose key figures cannot be connected to the recommendation or reproduced by another reviewer.
Apply the method
Work through each task before opening the model answer. Compare your reasoning with the review criteria. Written answers stay on this page and clear when you leave or reload it.
Applied task 1
Show model answer and review criteria
Base cash 1.10 and service 0.80 give 1.375× coverage and 0.10 headroom above the illustrative 1.25× threshold. Downside cash 0.88 supports at most 0.704 service, or 0.504 principal if interest stays 0.20. Any amendment requires agreement and testing of all future payments.
- Reconciles the numerator and full service denominator.
- Distinguishes affordable capacity from contractual obligations.
- States assumptions, proposed action and evidence needed for revised terms.
Applied task 2
Show model answer and review criteria
Extra receivables of 0.40 reduce available cash to 0.70 and coverage to 0.875×. Request ageing, contracts, subsequent collections and the debt schedule; update monthly liquidity and receivable eligibility together, with owners, warning triggers and lender-engagement dates.
- Calculates the timing shock under explicit uniform-sales assumptions.
- Separates operating cash, bank cash and financing availability.
- Links each risk to a document, responsible owner and timely action.
Method references
- Office of the Comptroller of the Currency — Commercial Loans
Primary reference for commercial credit analysis and repayment-source discipline. Used as analytical background, not as Ghanaian law; all ratios, thresholds and advance rates are hypothetical contractual examples.